Ukraine has returned to the top of the news agenda, with pro-Russian separatists occupying government buildings in the east of the country.
But using the levers of global finance, the conflict, with Europe and the US on one side and Russia on the other, is as much an economic battle as a physical one.
And with Russia now set on creating a new national payment system (NPS) to replace Visa and MasterCard, this fight is a reminder of the fundamental difference between the new world of decentralized digital currencies and the old world, where governments use payment systems as weapons of war.
The American monopoly on transactions
Visa and MasterCard accounted for 85% of the market share of global transactions in 2013. Although both are private companies, they are subject primarily to American law, which includes political sanctions against other countries.
The two effectively represent a de-facto monopoly on US transactions, and reminded Russian president Vladimir Putin of it after Russia annexed Crimea, when they halted credit card services to four banks linked to Russians targeted by US sanctions.
Services later resumed, but for the Russian government, whose statements on decentralised digital currencies have stood out as particularly hostile, the freeze gave them a taste of what happens when another government controls its payment infrastructure.
A Russian national payment system
In an alternative universe, the sanctions might turn Putin into a fan of Satoshi Nakamoto, the pseudonymous creator of the original Bitcoin protocol, but in the real world it reignited plans for a Russian NPS – and the only thing worse than using a tool your enemy controls is using a tool that citizens control.
Few people outside of financial circles had heard of the Kremlin plans for an NPS before the recent political crisis in Ukraine.
First announced back in 2011, the Russian NPS is linked to an ambitious plan to create a Universal Electronic Card (UEC). The UEC is basically a personal ID, bankcard, medical insurance, social security and pension card all in one. The initiative was launched in 2010 as has slowly been rolled out since.
The recent crisis and subsequent move by Visa and MasterCard have lit a fire under Putin’s plans for financial independence. It is likely that the NPS will be up and running before the year is out, with Russia’s two largest banks, Sberbank and VTB Bank, already competing for the project.
A different name, but fundamentally the same
Russian citizens will probably not even notice the switch to a Russian NPS, as it is mainly a software change than a hardware one. ATM terminals and cash registers will be reprogrammed and people will still be able to use their current Visa and MasterCard.
The main difference is that Russia will be able to mitigate the impact of external financial sanctions on internal money transfers. It wouldn’t be the first to build a national payment system. China has also built its own system, UnionPay.
But there is a clear advantage to the global use of a single payment system: international trade is lubricated by the quick and easy flow of money.
In the case of the US and Russia, opposition to America’s using the monopoly by Visa and MasterCard to enforce sanctions may lead to an alternative system in Russia. One day, it might trigger a large-scale shift to a decentralized system like bitcoin.
The consequences of that, good or bad, will be seismic.
This article was co-authored by Kadhim Shubber and Mark Jackson, a financial analyst from Moscow.